DOMINGO 16/12/2018
Dólar Banco Nación

Natural resources: thirsty for investment

Argentina's wealth contrasts with the level of investment it receives. What to know when allocating funds to natural resources in the country.

por  Juan Manuel Cocco

(Translation: Belén Prado)


An apocryphal myth about creation has it that God granted Argentina countless gifts: the most fertile land, the highest mountains, the mightiest rivers and all the climates in the world. Nevertheless, in order to compensate for such bounteousness, He gave it the Argentine people.

This cynical joke could well be applied to the country´s position with respect to its abundant natural resources but low investment.

Nevertheless the Government of Mauricio Macri is showing enthusiasm in reversing this situation. "In Argentina there are investment opportunities of over USD 175 billion," says Juan Procaccini, president of the Argentine Agency for International Investment and Trade (AAICI).

¿A promised land?

Argentina has the ninth largest agricultural area in the world. It has 4,500 kilometers of Andes mountains - which are rich in metals -, it has a similar extension of Atlantic coastline with abundant resources in fisheries, and it has the third largest reserves of unconventional hydrocarbons. In addition, it has a literacy rate of 98 percent, skilled labor and the best human development index in the region.

However, it has not managed to position itself among the top destinations for investment. According to the Economic Commission for Latin America and the Caribbean (ECLAC), Argentina received only USD 11.655 billion of Foreign Direct Investment (FDI) in 2015, just 6.50% of the USD 179.1 billion that captured the region.

An average of the recent years shows that only a quarter of the FDI that came to Argentina was allocated to Natural Resources.

What they want

Government expectations are ambitious. According to AAICI calculations, the investment potential for the Energy and Mining sector would be USD 76 billion, while the figure for the Agricultural Industry would be around USD 16 billion.

Only from the unconventional oil and gas exploitation at mega fields such as the  Vaca Muerta, in Patagonia, the national administration believes it could attract about USD 20 billion, plus another USD 13 billion just to develop irrigation systems that would expand the agricultural frontier and the meat industry.

But while the Government looks at the potential funding, those in charge of making and guiding investment decisions are thouroughly scanning Argentina. The assessment goes beyond the natural wealth of the third largest economy in Latin America.

Marcos Bazán, an expert in Mergers & Acquisitions at Deloitte, suggests investors "make a detailed and comprehensive business plan, especially taking into account macroeconomic variables such as inflation, devaluation, labor costs and market prices, among others."

Nestor García, Natural Resources Lead Partner at KPMG, agrees with this perspective: "Situational problems - political, institutional and economic - can undermine investment, although we are seeing very positive signs from the national government towards the market."

In general terms, the government ended currency exchange controls, came to an agreement with holdouts, lifted capital controls and issued debt again in international markets. With respect to Natural Resources, it eliminated withholding taxes on mining and agriculture produce, and it took action in order to correct electricity and gas rates.

The assessment carried out by businessmen also has its nuances, depending on the sector. For Gustavo Nieponice, from Boston Consulting Group (BCG), in Oil and Gas, there are four elements that determine the attractiveness of a region or country: natural resources, fiscal conditions, competitiveness to operate and government support. "In Argentina these four elements are present today," he claims.

To those elements, Marcelo Elizondo, Head of DNI (Desarrollo de Negocios Internacionales) Consultancy Firm, adds a key aspect: "Now, public policies are aligned favorably with these sectors," but he warns of the difficulties, "We still have a high fiscal deficit which affects inflation, scarce local funding and an old infrastructure," is his diagnosies.

Energy: great resources hacked by prices

The Government is committed to raising USD 76 billion for Oil & Gas, electricity and mining. Renewable energies are a great opportunity. The price of crude oil and respect for the rules of the game, as the major questions regarding investment.

There are three questions investors interested in disbursing funds in the Argentine energy sector repeat: Will the Government implement all the changes it proposed? When will the new regulatory framework be ready? Will President Mauricio Macri be re-elected in 2019?

They are not easy questions, but these uncertainties compete with the business opportunities presented by the country under a government perceived as more open to markets.

"It is clear that there is an appetite for foreign investors in Argentine energy assets. They want to meet, they ask for business opportunities," says Santiago Alsina, Head of Energy and Infrastructure at MBA Lazard, a firm dedicated to financial advisory and asset management.


The natural advantages are well known: huge shale gas and oil reserves, huge reserves of metals such as lithium, and a geography that is favorable for generating solar and wind energy.

According to the projections of the Argentine Agency for International Investment and Trade (AAICI), the investment opportunities in Energy amount to USD 76 billion, distributed as follows: USD 20 billion in unconventional gas and oil, another USD 20 billion in hydro and thermal power plants, USD 15 billion in renewable energy, USD 15 billion more in mining – lithium, gold, copper, potassium – and USD 6 billion in the petrochemical industry.

The Government is aware of this potential and acknowledges that the interest in Oil & Gas focuses on the upstream sector, which also generates significant disbursement to improve the infrastructure and the productive capacity.

The investments of Chevron, Sinopec, Dow, Gazprom and Petronas are examples of the interest that Argentina is generating in the hydrocarbon sector, but the greatest challenge to attract more such companies today is the depressed crude oil price. From the record high of July 2008, the price of a WTI barrel lost USD 100 or 70%. However, this situational disadvantage may be an opportunity for Mergers & Acquisitions, since any foreign investor will need a local partner to shorten the learning curve on the domestic market.

Renewable, clean and predictable

"The development of gas wells is an immediate need. But the replacement of fossil fuels and the use of renewable and clean sources that contribute to the environment should be the focus of official policy," considers Gustavo Neffa, Partner and Director of Research for Traders.

It is precisely in the renewable energy market, a sector with great growth potential, that the price is not a barrier. Since the Renewable Energy Act was passed in 2015, it was established that, by 2018, 8% of the total energy consumption must be produced from such sources, and by 2025 it should reach 20% (today it reaches just 1.8%).

Francisco Macias, an expert in Oil and Gas from Marval law firm, notes that one of the concerns of investors looking towards the country is "the lack of predictability in terms of the unchanging legal conditions under which investments shall be made." His colleague Luis Lucero, an expert in Energy and Natural Resources, says that "as soon as the community of investors realizes that there is a real will to achieve legal stability - which is what we are finding hard to achieve, just as we expected - investments should occur."

Agribusiness: the challenge of creating value

New tax and export conditions improved profitability. Investors are interested in the entire value chain. The macro, key to the sector.

The decision of the Mauricio Macri administration to reduce or eliminate the tax burden and the restrictions on exports in the agro-export sector immediately aroused the interest of foreign investors.

This is so because the strength and the degree of development of the country in this sector are recognized worldwide. The agribusiness is a wellspring of dollars. According to the Argentine Oil Industry Chamber (CIARA) and to the Cereal Exporters Center (CEC), the companies within the sector underwent a foreign exchange settlement of approximately USD 240 billion since 2003.

In a world demanding agri-food, production in Argentina can supply 450 million people, more than ten times its population. The Government's plan is to increase supply to cover 650 million people in the coming years.

To that end, the national administration is promoting a food industrialization plan which sets out the production of final products for consumption and not just raw materials. For this purpose alone, the Argentine Agency for International Investment and Trade (AAICI) has identified a potential investment of USD 500 million.

Meat and value chain

With respect to meat - beef, pork and chicken - the AAICI sees the potential to absorb another USD 5 billion. According to data from the United States Department of Agriculture, at the beginning of the 21st century Argentina was among the world's top five meat exporters, but by 2015 it had dropped to the 12th place.

The shift to zero withholdings for external sales and the elimination of permits imposed by the Export Operations Records (ROE) are two starting points valued by the meat market. "Among the “Pampa” products, in the case of beef there is a great opportunity due to the large regression that the chain has experienced in the last ten years. If things go well and the macroeconomic conditions are favorable, Argentina should once again become a major exporter in three or four years’ time," estimated Juan Manuel Garzon, Chief Researcher and Coordinator of the Agribusiness Area at Ieral, Fundación Mediterránea.

It is clear that Argentina is a global player in the production of grains and meat, but the interest of investors is not limited to primary products, it extends to the entire value chain. "There is much interest in the commercial chain of raw materials, from distributors with good regional presence and good reach to the producer, to materials manufacturers emphasizing higher value added," says Eduardo De Bonis, expert in agribusiness at First consulting firm, specializing in corporate finance.

Macro investor
The Government is convinced that, in addition, there is potential for investment in irrigation systems for USD 8 billion, to incorporate four million hectares of crops. And if USD 2,5 billion were added in favor of the forestry and pulp industry – which it believes possible - the investment potential of the agribusiness sector would total USD 16 billion.

However, as in the case of other natural resources, those who make the investment decisions are paying attention to the macroeconomic measures taken by the Macri administration. And they demand: lower inflation, competitive exchange rate, a reasonable tax system, suitable transportation infrastructure and a climate of lower labor unrest, among others.

Pedro Gerardo Cocco Rapalini
Pedro Gerardo Cocco Rapalini 13/09/2016 05:22:49

Excelente nota

Más notas de tu interés